As mentioned previously, the new RAH is being delivered through a combination of a PPP arrangement and works funded by the State.
The total budget for the new RAH project comprising the nominal construction cost by Project Co and State funded works (including transition costs) is approximately $2.3 billion. The components comprising the budget as at 30 June 20159 are:
$’million
Construction cost by Project Co (nominal) 1 849.8
State funded works including transition activities (nominal) 417.4
Total 2 267.2
The construction cost by Project Co excludes financing costs and the costs of operating services provided by Project Co during the operating term. These costs, including State funded works, are further discussed under sections 4.1.3, 4.1.4 and 4.1.5.
4.1.2 Net present value of construction and operating services costs provided by Project Co
As reported in the Auditor-General’s Annual Report for the year ended 30 June 2014, the estimated total risk adjusted value of the contractual arrangement at financial close (excluding
9
The budget information as at 30 June 2015 does not reflect the financial implications of the Deed executed between the Minister for Health and Project Co on 17 September 2015.
State works) was $3160.6 million. This value represents the net present cost of financing the construction, maintenance and the provision of non-clinical services by Project Co over a 35 year period.
4.1.3 Summary of project budget approvals to 30 June 2015
The budget for the new RAH project has evolved since the original business case (the Outline Business Case) for the procurement of the facility using a PPP delivery model was approved by Cabinet in December 2007. The indicative nominal capital cost estimate for the project developed as part of the Outlined Business Case was $1677 million. This estimate was based on the information known at the time and reflected an initial cost model developed prior to site selection and investigation and cost design works being undertaken.
There have been a number of revisions to the nominal capital cost since Cabinet approved the business case in 2007 reflecting:
changes made to the scope of works to meet the State’s functional requirements
additional State funded works including ICT works, utilities infrastructure works, clinical equipment, resources needed to mitigate project delays and transition costs. In May 2011, Cabinet noted that the nominal estimated construction cost for the new RAH project was $2094.5 million comprising:
Project Co’s nominal construction cost of $1849.8 million
State works costs of $244.7 million.
Cabinet also approved the Minister for Health executing the final Project Agreement and the Project Director signing the financial close documentation.
Consistent with the Cabinet approval, the PPP Project Agreement between Project Co and the State was executed in May 2011 and achieved financial close in June 2011. The scope of works, services and finance arrangements to be provided by the preferred PPP proponent (Project Co) for the project were finalised upon reaching financial close.
Details of revisions made to the total project budget (nominal) as approved by Cabinet since the PPP May 2011 approval is summarised in the table below.
Approved budget at project agreement financial close State funded electrical supply infrastructure works State works transition funding Removal of EPAS rollout funding from the State works budget
May 2011 September 2012 October 2014 May 2015
$’million $’million $’million $’million
PPP works 1 849.8 1 849.8 1 849.8 1 849.8
State funded works 244.7 248.1 424.6 417.4
4.1.4 Budget for PPP construction costs
The contractual and financial close arrangements to build, operate and maintain and provide non-medical support services for the new RAH were concluded with Project Co in June 2011. As previously mentioned, Project Co has subcontracted a builder (HYLC Joint Venture) to design, construct and commission the new RAH. Pursuant to the contractual arrangement with Project Co, the nominal capital cost for the design and construction of the new RAH by Project Co is $1849.8 million.
Under the Project Agreement, upon reaching commercial acceptance the State is required to make service payments to Project Co during the operating phase of the project. The State is not required to make service payments for the hospital until the facility is successfully completed.
Accordingly, to date, no service payments have been paid to Project Co.
4.1.5 Budget for State funded works to 30 June 2015
In addition to the works provided by Project Co pursuant to the PPP arrangement, Cabinet has approved funding elements of the project that are to be delivered and financed by the State. These works include core clinical equipment, precinct works and transition costs.
In May 2011 Cabinet approved $244.7 million for State works comprising:
utilities infrastructure works
ICT
fixtures, furniture and equipment (clinical)
project management
contingency
road alterations and other works.
The budget was increased by $3.4 million to $248.1 million in September 2012 to fund additional electrical supply infrastructure. The funding was required for SA Health to facilitate a cross-Government electrical infrastructure solution that incorporated elements of the deferred Rail Electrification Infrastructure Central Substation project.
In October 2014, Cabinet approved an additional $176.6 million for State works to facilitate the successful transition from the existing RAH to the new RAH. The Cabinet was advised that the additional funding was determined using a bottom up estimate of resources, capital spending needs, industry benchmarks and appropriate expert review to ensure work streams meet their functional responsibilities and contractual obligations of the State. The submission highlighted that an external consultant (the Calcutta Group) review completed in May 2014, noted significant progress was made to governance arrangements, project/contract management and transition planning. The consultant had confirmed the need to address shortcomings in a number of key areas such as ICT, clinical engagement, communications and governance. The main areas for the funding increase were:
project office resourcing and transition activities – $66.9 million
decommissioning of the existing RAH – $4.3 million
dual running costs for a period of 73 days for running both the existing RAH and the new RAH – $17.4 million ($14.8 million including a $2.6 million funding offset)10
the rollout of EPAS at the new RAH 11 – $7.3 million
other expenditure totalling – $22.7 million.
Cabinet was advised of identified expenditure, in the form of a central contingency, totalling $35.3 million, for potential risks relating to:
any delay costs – $10.8 million
delays in the Distribution Centre model – $1.5 million
not meeting the clinical equipment re-use target of 25% – $10 million
ICT request for proposal – $13 million.
The funding request did not address any claims for not known contamination including the direct costs and time delays associated with the remediation of the site. Any successful claims were to be addressed in future Cabinet submissions. The matter of claims for not known contamination remediation is discussed in section 2.2.5.
Cabinet was also advised that if EPAS was not installed at the new RAH, alternative options could result in a subsequent submission to Cabinet for appropriate funding.
It was also advised the funding request was formed on the basis that Technical Completion and Commercial Acceptance would be reached in accordance with the contract dates. If there was any delay due to modifications or circumstances outside of the control of the new RAH program, these events would require additional review to address any potential budgetary impact once known.
The funding request was subject to a number of other assumptions including the following:
as the project progressed, there may be a need for modifications which need to be assessed to determine the cost impact
the holding costs of running the hospital during the period the existing hospital is being decommissioned (ie July 2016 to December 2016) were included up to December 2016 in the funding request. Once the decommissioning is completed, the vacated existing RAH buildings become the responsibility of the Urban Renewal Authority
the approved budget for clinical equipment assumed a 25% re-use target (by value). Also a $10 million contingency was included in case the target is not achieved
10
The funding offset represents a reduction to the budget based on the assumption that the services (ie catering, orderlies, cleaning etc) at the existing RAH would be reduced as operations are ramped down.
11
The October 2014 Cabinet submission indicated that EPAS was initially expected to be fully rolled out across SA Health before the opening of the new RAH. It also indicated that SA Health now required funding (ie $7.299 million) to successfully transition EPAS from the existing RAH to the new RAH. This funding was subsequently removed in May 2015 following a decision not to implement EPAS at the existing RAH.
SA Pathology identified a requirement of $8.2 million for equipment relating directly to the operation of the new RAH to be funded through the SA Health Biomedical Equipment Annual Program
the funding request excluded any allowances for additional cost pressures across SA Health created as a result of the ramping down of services at the existing RAH and ramping up services at the new RAH.
The approved budget recognised that approximately $5.1 million of funding for the existing RAH site, predominantly associated with operational contracts and backfill for specific project roles, had been applied to offset the additional funding requirement. Further, the budget included a $1.5 million offset for staffing costs for people working on the new RAH Program, allocated from the SA Health Biomedical Equipment (BME) Annual Program to reduce the additional funding requirement.
In May 2015 Cabinet approved, as part of the 2015-16 annual budget process, the removal of $7.3 million of funding to help implement EPAS from the existing RAH to the new RAH. The funding was removed following the decision to implement EPAS directly at the new RAH.
The table below summarises the revisions to the State funded works budget since May 2011.
May 2011 Sept 2012 Oct 2014 May 2015
Total new RAH funding
$’million $’million $’million $’million $’million
Utilities infrastructure works 35.1 3.4 - - 38.5
ICT 17.2 - 29.2 - 46.4
Furniture, fixture and equipment (clinical
equipment) 148.0 - - - 148.0
Project management 30.5 - 7.3 - 37.8
Contingency 7.1 - - - 7.1
Road alternations and
other works 6.8 - - - 6.8
New RAH Program office - - 64.3 - 64.3
Dual running costs - - 17.4 - 17.4
Outsourced procurement - - 10.0 - 10.0
Physical move - - 4.7 - 4.7
Workforce modelling - - 3.4 - 3.4
Enterprise rollout – EPAS - - 7.3 -7.3 -
Decommissioning – existing
RAH site - - 4.3 - 4.3
Additional expenditure - - 35.3 - 35.3
Total project cost 244.7 3.4 183.2 -7.3 424.0
Funding offsets:
CALHN/SA Health funding - - -5.1 - -5.1
BME funding - - -1.5 - -1.5
Total project cost
4.1.6 Costs relating to the project not included in the project budget
During our review we noted certain costs directly related to the operation of the new RAH that are not included in the budget for the new RAH. For instance, the new RAH incorporates pathology facilities. We noted, however, the clinical equipment State funded budget ($148 million) approved by Cabinet excludes the equipment requirements for the pathology facilities at the new RAH. The cost of the pathology equipment, estimated at $8.2 million, is to be funded from the SA Health Biomedical Annual Program budget. As a result, pathology equipment costs for the new RAH are reported and monitored against the Biomedical annual capital budget rather than the new RAH State works budget.
Further, it is noted that not all direct costs associated with implementing the various ICT enterprise systems (ie EPAS, ESMI, EPLIS, iPharmacy etc) are included in the State works budget.
To ensure greater transparency in reporting the costs incurred to deliver the new RAH project, we recommend SA Health enhance existing reporting for the project. In particular, by also reporting on costs associated with the project funded from other program budgets.
This matter will be considered in the next phase of our review.